Pettingill Enterprises, Inc. v. Blackstone Equipment Financing LP

UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	PETTINGILL ENTERPRISES, INC.,
A New Mexico corporation,
and
DAVID PETTINGILL and
PAMELA PETTINGILL,
Debtors. 	Jointly administered under
Case No. 11-12-10515 JA
PETTINGILL ENTERPRISES, INC.,
A New Mexico corporation,
Plaintiff,
v. 	Adversary No. 12-1217 J
BLACKSTONE EQUIPMENT FINANCING, L.P.,
A California Limited Partnership,
Defendant.
ORDER DENYING BLACKSTONE EQUIPMENT FINANCING, L.P.’S
MOTION TO DISMISS
THIS MATTER is before the Court on Blackstone Equipment Financing, L.P.’s Motion
to Dismiss (“Motion to Dismiss”) filed by Blackstone Equipment Leasing, L.P. f/k/a Blackstone
Equipment Financing, L.P. (“Blackstone”), by and through its attorneys of record, Butt Thornton
& Baehr PC (Rodney L. Schlagel). See Docket No. 10. 	Plaintiff Pettingill Enterprises, Inc.
(“PEI”), opposes the motion. See Plaintiff’s Response to Blackstone Equipment Financing’s
Motion to Dismiss (“Response”), Docket No. 14. 	Blackstone also filed a reply. See Blackstone
Equipment Financing, L.P.’s Reply in Support of its Motion to Dismiss (“Reply”), Docket No.
15. 	Blackstone asserts that a determination by Judge Starzynski in the PEI bankruptcy case that
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 1 of 11

2
the transaction between Blackstone and PEI constituted a “true lease” and not a financing
arrangement forecloses PEI from asserting a fraudulent transfer claim against Blackstone in this
adversary proceeding relating to the same transaction. 	Blackstone requests the Court to dismiss
PEI’s complaint under Fed.R.Civ.P. 12(b)(6) for failure to state a claim, arguing that res judicata
and collateral estoppel bar PEI’s claims. 	After consideration of the Motion to Dismiss, the
Response, and the Reply, and being otherwise sufficiently informed, the Court finds that neither
res judicata nor collateral estoppel apply to PEI’s claims raised in this adversary proceeding.
The Court, will, therefore, deny the Motion to Dismiss.
DISCUSSION
The purpose of Fed.R.Civ.P. 12(b)(6), made applicable to adversary proceedings by
Fed.R.Bankr.P. 7012, is to test the sufficiency of the complaint. Mobley v. McCormick, 40 F.3d
337, 340 (10 th Cir. 1994)(stating that Rule 12(b)(6) tests “the sufficiency of the allegations
within the four corners of the complaint after taking those allegations as true.”)(citation omitted).
In evaluating a motion to dismiss, the Court accepts as true all well-pleaded allegations in the
complaint, disregarding any legal conclusions, and evaluates the factual allegations in the light
most favorable to the plaintiff. 	Moore v. Guthrie, 438 F.3d 1036, 1039 (10 th Cir. 2006)(stating
that under Rule 12(b)(6), “‘all well-pleaded factual allegations in the . . . complaint are accepted
as true and viewed in the light most favorable to the nonmoving party.’”)(quoting Sutton v. Utah
State Sch. For the Deaf and Blind, 173 F.3d 112, 1236 (10th Cir. 1999)); Ashcroft v. Iqbal, 556
U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009)(explaining that “the tenet that a
court must accept as true all of the allegations contained in a complaint is inapplicable to legal
conclusions.”).
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 2 of 11

3
Res judicata may be raised through a motion to dismiss; however, the facts necessary to
support the defense must be apparent from the face of the pleadings. See Miller v. Shell Oil Co.,
345 F.2d 891, 893 (10 th Cir. 1965)(reversing court’s decision to grant a motion to dismiss based
on defense of res judicata, where the facts that would support the defense were not contained in
the complaint). 	See also, Andrews v. Daw, 201 F.3d 521, 524 n.1 (4th Cir. 2000)(acknowledging
that the affirmative defense of res judicata may be raised through a motion to dismiss under Rule
12(b)(6), but “‘only if it clearly appears on the face of the complaint.’”)(quoting Richmond,
Fredericksburg & Potomac R. Co. v. Forst, 4 F.3d 244, 250 (4th Cir. 1993)).1 If evidentiary
material outside the complaint is considered, the Court must treat the motion as a motion for
summary judgment under Fed.R.Civ.P. 56. 	See Rule 12(d), Fed.R.Civ.P., made applicable to
adversary proceedings by Rule 7012, Fed.R.Bankr.P.; Miller v. Shell Oil, 345 F.2d at 893
(stating that, while a defendant may raise an affirmative defense through a motion to dismiss, the
court must treat the motion as a motion for summary judgment under Rule 56, Fed.R.Civ.P. if
the affirmative defense is based upon matters outside of the complaint). Alternatively, the party
asserting res judicata or collateral estoppel through a motion to dismiss may request the Court to
take judicial notice of additional documents filed of record in the prior case. Cf. Andrews v.
Daw, 201 F.3d at 524 n.1 (stating that “when entertaining a motion to dismiss on the ground of
res judicata, a court may take judicial notice of facts from a prior judicial proceeding when the
res judicata defense raises no disputed issue of fact.”)(citations omitted).
1But cf. Test Masters Educ. Serv., Inc. v. Singh, 428 F.3d 559, 570, n.2 (5 th Cir. 2005)(stating that, “generally a res
judicata contention cannot be brought in a motion to dismiss” but acknowledging that, where the trial court treats a
motion to dismiss as a motion for summary judgment, dismissal under 12(b)(6) premised on res judicata is not
reversible error)(citation sand internal quotations omitted).
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 3 of 11

4
The Complaint includes the following factual allegations:
a. 	PEI filed a voluntary petition under Chapter 11 of the Bankruptcy Code on
February 14, 2012. See Complaint to Recover Fraudulent Transfers
(“Complaint”), ¶ 3 – Docket No. 1.
b. 	On May 31, 2011, and within two years prior to the filing of the [bankruptcy]
petition, PEI sought to borrow funds from Blackstone, and Blackstone agreed
to provide funds to PEI, but on terms designed by Blackstone. Complaint, ¶
5.
c. 	In order to provide funding to PEI, Blackstone arranged an ‘equipment lease’
which required PEI to first assign to Blackstone, as a ‘sale’ specific equipment
then owned by BEI, which equipment is listed on the Blackstone ‘lease,’ (the
‘listed equipment’), and then for PEI to ‘lease’ such listed equipment back
from Blackstone. PEI has, in the underlying chapter eleven proceeding,
asserted that the ‘lease’ referred to with Blackstone is actually a financing
arrangement whereby Blackstone loaned the Debtor funds, and took a security
interest in certain of PEI’s assets, but Blackstone asserts that such
arrangement is a ‘true lease,’ and the Court has not determined that the
arrangement is a true lease. Complaint, ¶ 6.
The Motion to Dismiss includes the following additional facts:
a. 	On March 26, 2012, Blackstone filed a Motion for Relief from the Automatic
Stay as to Leased Equipment, or in the Alternative, for Adequate Protection
pursuant to 11 U.S.C. § 365(D)(1). Motion to Dismiss, ¶ 2.
b. 	After hearing oral arguments and testimony from all parties, in an oral ruling
on June 20, 2012, Judge Starzynski ordered that the Plaintiff commence
making monthly adequate protection payments to Defendant in the amount of
$23,559.55 , plus tax, for a total of $25,380.58, with the first payment being
due on July 2, 2012, and all subsequent payments being due on the first of the
month. Motion to Dismiss, ¶ 3.
c. 	At no time in Plaintiff’s Response to the Motion for Adequate Protection, or
during oral arguments did Plaintiff argue that the transaction between
Blackstone and Plaintiff was a fraudulent transfer. Motion to Dismiss, ¶ 4.
d. 	Plaintiff filed its Complaint to Recover Fraudulent Transfers on June 21,
2012. Motion to Dismiss, ¶ 5.
PEI does not contest these additional facts raised by Blackstone in its Motion to Dismiss. See
Response, ¶ 1.
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 4 of 11

5
Blackstone asserts that Judge Starzynski’s prior determination as part of the stay
litigation that the transaction at issue constitutes a true lease bars PEI under the doctrines of res
judicata or collateral estoppel from asserting a claim to avoid the transaction as a fraudulent
transfer pursuant to 11 U.S.C. § 548. 	“Res judicata and collateral estoppel relieve parties of the
cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing
inconsistent decisions, encourage reliance on adjudication.” Northern Natural Gas Co. v.
Grounds, 931 F.2d 678, 681 (10 th Cir. 1991)(citing Montana v. United States, 440 U.S. 147, 153-
154, 99 S.Ct. 970, 973-974, 59 L.Ed.2d 210 (1979)).
Under federal law2 , res judicata (also known as claim preclusion) requires satisfaction of
the following elements: “(1) a judgment on the merits in the earlier action; (2) identity of the
parties or their privies in both suits; and (3) identity of the cause of action in both suits.” Hatch
v. Boulder Town Council, 471 F.3d 1142, 1149 (10 th Cir. 2006)(quoting Yapp v. Exel Corp., 186
F.3d 1222, 1226 (10 th Cir. 1999)). In other words, “[a] claim is barred by res judicata when the
prior action involved identical claims and the same parties or their privies.” Frandsen v.
Westinghouse Corp., 46 F.3d 975, 978 (10 th Cir. 1995)(citing Satsky v. Paramount
Communications, Inc., 7 F.3d 1464, 1467 (10 th Cir. 1993)). Res judicata bars re-litigation of not
only the issues that were actually decided in the prior litigation, but also issues that could have
been raised in the prior litigation. See Frandsen v. Westinghouse, 46 F.3d at 978 (“Res judicata .
. . precludes the parties or their privies from relitigating the issues that were decided or issues
that could have been raised in the earlier action.”)(citing Allen v. McCurry, 449 U.S. 90, 94, 101
S.Ct. 411, 414, 66 L.Ed.2d 308 (1980)); Pelt v. Utah, 539 F.3d 1271, 1281 (10 th Cir.
2008)(same). 	In other words, “[r]es judicata prevents litigation of all grounds for, or defenses
2 Blackstone cites New Mexico state law for the required elements under res judicata and collateral estoppel . But
because a federal bankruptcy court issued the order that Blackstone asserts has res judicata and collateral estoppel
effect, federal law regarding res judicata and collateral estoppel applies.
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 5 of 11

6
to, recovery that were previously available to the parties, regardless of whether they were
asserted or determined in the prior proceeding.” 	Brown v. Felsen, 442 U.S. 127, 131, 99 S.Ct.
2205, 2209, 60 L.Ed. 2d 767 (1979)(citation omitted).3
The factual allegations in the Complaint and the additional uncontested facts identified in
Blackstone’s Motion to Dismiss establish the following: 1) that the parties in this adversary
proceeding are the same as the parties that participated in the litigation arising from Blackstone’s
Motion for Relief from the Automatic Stay as to Leased Equipment, or in the Alternative, for
Adequate Protection Pursuant to 11 U.S.C. § 365(d)(1) (the “Stay Motion”); 2) that Judge
Starzynski issued an order on the Stay Motion determining that the transaction constituted a true
lease rather than a financing arrangement under which Blackstone should be treated as a secured
creditor; and 3) that PEI did not assert its claim that the transaction at issue was a fraudulent
transfer in defense of the Stay Motion. 	These factual allegations establish the first two elements
required for purposes of res judicata, namely, an identity of parties and a judgment on the merits
of the Stay Motion.4 However, the claim at issue in the stay litigation and the fraudulent transfer
claim are not identical causes of action; each action is governed by a different section of the
Bankruptcy Code. 5 Cf. In re Ginter, 349 B.R. 193, 196 (8th Cir. BAP 2006)(pointing out that a
3 See also Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 327 n.5, 99 S.Ct. 645, 649, 58 L.2d.2d 552
(1979)(stating that res judicata bars relitigation in a second suit of the same cause of action by the same parties or
their privies).
4See Franklin Sav. Ass’n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 n.3 (10 th Cir. 1994)(“As a general rule,
orders granting or denying relief from an automatic stay are appealable final orders.”)(citation omitted). But cf.
Simon v. JP Morgan Chase Bank (In re Lebbos), 455 B.R. 607, 612 (Bankr.E.D.Mich. 2011)(finding that the first
element of res judicata was not satisfied with regard to avoidance and preference claims filed by the trustee under 11
U.S.C. § 544 and 11 U.S.C. § 547 following the entry of an order granting an uncontested motion for relief from
stay, reasoning that the scope and effect of the order granting relief from stay “is determined and limited to the
merits and grounds” raised by the creditor).
5 A motion for relief from the automatic stay is governed by 11 U.S.C. § 362(d), which provides that the automatic
stay may be terminated, annulled, modified, or conditioned for “cause, including the lack of adequate protection of
an interest in property.” 11 U.S.C. § 362(d)(1). A claim to avoid a transfer as constructively fraudulent is governed
by 11 U.S.C. § 548(a), which provides, in part, that a trustee (or debtor in possession with the powers of a trustee)
may avoid a transfer of an interest in property, or obligation made or incurred by the debtor within two years of the
petition date, if the debtor “received less than reasonably equivalent value in exchange for such transfer or
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 6 of 11

7
motion for relief from stay is governed by a different code section than a motion to avoid lien).
Thus, in order for res judicata to apply, PEI’s fraudulent transfer claim must be a claim that
otherwise could have been raised in the context of the Stay Motion.
PEI points out that it could not have raised its fraudulent transfer claim as part of the Stay
Motion litigation because a claim for fraudulent transfer can only be brought by adversary
proceeding. 	See Fed.R.Bankr.P. 7001. Blackstone concedes that an action to avoid a transfer
as constructively fraudulent under 11 U.S.C. § 548 must be brought by adversary proceeding, but
contends that PEI should have raised its fraudulent transfer claim as a defense to Blackstone’s
Stay Motion. 	This Court disagrees.
Claim preclusion forces “‘a plaintiff to explore all of the facts, develop all the theories,
and demand all the remedies in the first suit’” that pertain to a particular transaction or series of
related transactions forming the basis of a plaintiff’s claims. Stone v. Dep’t of Aviation, 453 F.3d
1271, 1279 (10th Cir. 2006)(quoting 18 Federal Practice and Procedure § 4408)(emphasis added
by Stone). A defendant, however, generally need only assert compulsory counterclaims to avoid
application of res judicata in a subsequent suit. Id. at 1280 (applying res judicata under state law,
stating that “principles of claim preclusion only oblige a defendant to assert a compulsory
counterclaim as required by state law.”)(emphasis in original).
PEI’s fraudulent transfer claim is not a counterclaim that could have been asserted as part
of the Stay Motion litigation. Stay Motions are contested matters governed by Fed.R.Bankr.P.
9014. Rule 9014(c) specifies which additional rules apply to contested matters. Fed.R.Bankr.P.
9014(c). Rule 7013, which governs counterclaims, is not one of the rules made applicable to
contested matters by Rule 9014. See Fed.R.Bankr.P. 9014(c); Nat’l Westminster Bank, U.S.A. v.
obligation” and was either insolvent as of the date of the transfer or obligation, became insolvent as a result of the
transfer or obligation. 11 U.S.C. § 548(a)(1)(B)(i) and (ii)(I).
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 7 of 11

8
Ross, 130 B.R. 656, 671 (S.D.N.Y. 1991)(noting that a motion for relief from stay is not an
adversary proceeding to which Rule 7013 applies and concluding that res judicata did not bar the
trustee’s claims). Thus, PEI could not have raised its fraudulent transfer claim as a counterclaim
in the contested matter and is not, therefore precluded by res judicata from asserting its claim in
this adversary proceeding.
Other bankruptcy courts have similarly concluded that a debtor or case trustee is not
precluded from asserting claim to avoid a fraudulent transfer or preferential transfer by virtue of
failing to raise such claim in connection with a creditor’s motion for relief from stay. 	See, e.g.,
In re Goldberg, 277 B.R. 251, 266 (Bankr.M.D.La. 2002)(stating that “[s]tay relief does not
extinguish avoidance actions”); Willis v. Borg-Warner Acceptance Corp. (In re Willis), 48 B.R.
295, 303-304 (D.C. Tex. 1985)(rejecting the creditor’s assertion that the debtors should have
raised their fraudulent transfer claim as part of its action to lift the automatic stay); Coleman v.
Home Sav. Ass’n (In re Coleman), 21 B.R. 832, 836 (Bankr.S.D.Tex. 1982)(concluding that
“[a]n action to avoid a fraudulent transfer is simply not a proper issue in a § 362 complaint” and
refusing to consider res judicata as a defense to the fraudulent transfer action). 6 See also Grella
v. Salem Five Cent Sav. Bank, 42 F.3d 26, 32 (1st Cir. 1994)(collecting cases and observing that,
given the summary nature of stay relief proceedings, a decision to grant stay relief does not
involve the determination of counterclaims; thus, such counterclaims are not precluded from
being asserted through a later proceeding).
In Lebbos, the bankruptcy court considered whether res judicata barred a subsequent suit
by a trustee to avoid a creditor’s lien under 11 U.S.C. § 547 and 11 U.S.C. § 544 following an
order granting an uncontested motion for relief from the automatic stay. Lebbos, 455 B.R. at
6 See also Ginter, 349 B.R. at 197 (stating that “[l]ien avoidance rights are not affirmative defenses to a motion for
relief from the automatic stay” and concluding that res judicata did not apply to bar a subsequent suit to avoid the
lien that was the subject of the prior order granting stay relief).
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 8 of 11

9
611. 	The Lebbos court acknowledged that, while it may be appropriate to raise a defense or
counterclaim in response to a motion for relief from stay, “any such defenses or counterclaims
raised during a § 362(d) hearing would and should still be pursued in the context of an adversary
proceeding for a final decision on the merits.” Lebbos, 455 B.R. at 614 (citing In re Hurst, 409
B.R. 79, 83 (Bankr.D.Md. 2009))(remaining citation omitted). 	This Court agrees that a final
adjudication of the debtor’s fraudulent transfer claims must be determined in an adversary
proceeding. 	Res judicata thus does not bar PEI’s claim.
Like res judicata, collateral estoppel bars re-litigation in a subsequent suit, but differs
from res judicata in that the second suit involves a different cause of action. Parklane Hosiery v.
Shore, 439 U.S. at 317 n.5. Collateral estoppel (also known as issue preclusion) precludes
parties from re-litigating issues that have already been determined in a prior valid, and final
judgment. See Dodge v. Cotter Corp., 203 F.3d 1190, 1198 (10 th Cir. 2000)(“‘When an issue of
ultimate fact has once been determined by a valid and final judgment, that issue cannot again be
litigated between the same parties in any future lawsuit.’”)(quoting Ashe v. Swenson, 397 U.S.
436, 443, 90 S.Ct. 1189, 25 L.Ed.2d 469 (1970)). The required elements for collateral estoppel
under federal law are:
(1) the issue previously decided is identical with the one presented in the
action in question, (2) the prior action has been finally adjudicated on the
merits, (3) the party against whom the doctrine is invoked was a party, or
in privity with a party, to the prior adjudication, and (4) the party against
whom the doctrine is raised had a full and fair opportunity to litigate the
issue in the prior action.
Dodge v. Cotter, 203 F.3d at 1198 (citing Murdock v. Ute Indian Tribe of Uintah
and Ouray Reservation, 975 F.2d 683, 687 (10 th Cir. 1992)
Here, the prior decision was issued as a result of the Stay Motion and determined that the
transaction at issue constituted a true lease. 	Blackstone argues that PEI’s fraudulent transfer
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 9 of 11

10
claim is an attempt to re-litigate the same issue because the fraudulent transfer claim contests the
validity of the lease. Blackstone characterizes the prior litigation as a challenge to the ownership
of the equipment that was the subject of the transaction, and asserts that the Court’s prior
determination that Blackstone is the owner of the leased equipment is the same issue to be
decided as part of PEI’s fraudulent transfer claim. 	This Court disagrees.
PEI’s fraudulent transfer claim under 11 U.S.C. § 548 alleges 1) that PEI received less
than reasonably equivalent value from Blackstone in exchange for what PEI provided to
Blackstone as part of the subject transaction; and 2) that PEI was insolvent or became insolvent
as a result of the transfers, was engaged or about to engage in transactions that would leave PEI
with unreasonably small capital, or believed it would incur debts that would be beyond PEI’s
ability to pay as those debts matured. See Complaint, ¶¶ 11 and 12. There is presently no
indication that the Court’s prior determination that the transaction constituted a “true lease” fully
adjudicated the issue of reasonably equivalent value; nor did the prior determination adjudicate
whether PEI satisfied one of the three alternative additional requirements under 11 U.S.C. §
548(a)(1)(B)(ii). Blackstone asserts that PEI’s fraudulent transfer claim again challenges the
validity of the lease. 	But a true lease can form the basis of a claim for fraudulent transfer.7
Therefore, if PEI were to prevail on its fraudulent transfer claim, that result would be consistent
with the determination that the transaction in question is a true lease. Thus, even though PEI’s
fraudulent transfer claim arises from the same transaction that was the subject of the Stay
Motion, the issue previously decided is not identical to the issues now raised in this adversary
7See, e.g., In re Keeley and Grabanski Land P’ship, 2012 WL 764442 (Bankr. N.D. Mar. 7, 2012)(avoidance of a
lease as a fraudulent transfer under § 548); Lowe v. B.R.B. Enterprises, Ltd. (In re Calvillo), 263 B.R. 214
(W.D.Tex. 2000)(suit filed by Chapter 7 trustee to avoid sale and leaseback arrangement as constructively
fraudulent); Kapila v. Clark (In re Trafford Distributing Center, Inc.), 431 B.R. 263, 298 (Bankr.S.D.Fla.
2010)(transfers of additional rent were constructively fraudulent); Nickless v. Pappas (In re Prime Mortgage Fin.,
Inc.), 2011 WL 4572006 (1 st Cir. BAP Feb. 14, 2011)(lease payments made by debtor corporation on behalf of its
principal were constructively fraudulent where debtor-corporation did not receive reasonably equivalent value in
exchange for the payments).
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 10 of 11

11
proceeding. Nor did PEI have a full and fair opportunity to litigate its fraudulent transfer claim
as part of the contested Stay Motion litigation. 	Consequently, the elements necessary to the
application of collateral estoppel to bar PEI’s fraudulent transfer claim have not been satisfied.
WHEREFORE, IT IS HEREBY ORDERED, that the Motion to Dismiss is DENIED.
___________________________________
ROBERT H. JACOBVITZ
United States Bankruptcy Judge
Date entered on docket: November 2, 2012
COPY TO:
Michael Romeo Demarco
The Law Offices of Michael R. Demarco, E
Attorney for Plaintiff
Box 390
McIntosh, NM 87032
Matthew A. Jones
Rodney L. Schlagel
Sherrill K. Filter
Attorneys for Defendant
PO Box 3170
Albuquerque, NM 87190
Case 12-01217-j Doc 17 Filed 11/02/12 Entered 11/02/12 14:38:59 Page 11 of 11